Sun, Nov 11, 2007 - Page 10 News List

Euro stays level as traders seek cover

CREDIT CRUNCH While the euro held steady against the US dollar, the euro and the greenback weakened against the yen as investors avoided risky carry trading


The euro held steady against the dollar here on Friday as fears about the depth of a credit crunch sent investors fleeing for traditional safe havens, strengthening the greenback and the yen.

The euro had jumped to a new high of US$1.4752 in early European trade, a day after the European Central Bank kept its key interest rate at 4 percent and US Federal Reserve Chairman Ben Bernanke warned of deepening risks to the US economy.

The 13-nation currency later fell as low as US$1.4632 before edging up to US$1.4677 around 10pm GMT, virtually unchanged from US$1.4676 late on Thursday in New York.

Both the euro and the US dollar weakened against the Japanese currency. The euro fell to ¥162.43 from ¥165.22 late on Thursday, and the dollar to ¥110.66 from ¥112.56.

"The flat performance of the greenback is consistent with today's two key pieces of data relating to the United States' international trade," said Patrick Fearon, an analyst at AG Edwards.

The US trade deficit in September fell to US$56.5 billion, its lowest level since May 2005, "and that is bullish for the US currency," he said, noting a separate report that showed last month's import prices jumped 1.8 percent, partly owing to the dollar's weakness.

Weak US consumer confidence figures released on Friday also fueled speculation of a US interest rate cut.

A preliminary University of Michigan consumer confidence indicator for this month fell to 75 from 80.9 last month, well below expectations for a reading of 80.

"Unfortunately the situation is likely to deteriorate further given the ongoing deterioration in the housing market, the negative effects of falling equity markets and the erosion of purchasing power caused by the surge in energy costs," ING economist James Knightley said.

"Consequently we suspect the Fed will be forced into a December rate cut with rates likely to move below four percent in the second quarter of 2008," he added.

US interest rates stand at 4.5 percent after being cut by 75 basis points in two moves since September, making the US dollar less attractive as an investment compared with the euro.

Rumors that British banks have sustained heavy losses as a result of the crisis in the US subprime mortgage sector -- involving loans provided to homebuyers with poor credit histories -- have increased risk aversion, pushing the pound sharply off morning highs.

"The pound's dropped sharply due to speculation of large losses in the UK banking sector," Steve Pearson at HBOS said.

This in turn boosted the yen as increasingly cautious investors pull out of the risky carry trade, where they sell the Japanese currency to invest in higher-yielding ones.

In late New York trading, the pound was at US$2.0901, down from US$2.1073 late on Thursday.

The dollar slipped to 1.1224 Swiss francs from SF1.1277.

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